Sharing risk with the government: How taxes affect corporate risk taking

Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its down...

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Main Authors: LJUNGQVIST, Alexander, ZHANG, Liandong, ZUO, Luo
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Language:English
Published: Institutional Knowledge at Singapore Management University 2017
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Online Access:https://ink.library.smu.edu.sg/soa_research/1628
https://ink.library.smu.edu.sg/context/soa_research/article/2655/viewcontent/Sharing_risk_with_the_government__How_taxes_affect_corporate_risk.pdf
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spelling sg-smu-ink.soa_research-26552019-01-21T02:34:35Z Sharing risk with the government: How taxes affect corporate risk taking LJUNGQVIST, Alexander ZHANG, Liandong ZUO, Luo Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government. 2017-06-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1628 info:doi/10.1111/1475-679X.12157 https://ink.library.smu.edu.sg/context/soa_research/article/2655/viewcontent/Sharing_risk_with_the_government__How_taxes_affect_corporate_risk.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Risk taking corporate taxes Accounting Corporate Finance
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Risk taking
corporate taxes
Accounting
Corporate Finance
spellingShingle Risk taking
corporate taxes
Accounting
Corporate Finance
LJUNGQVIST, Alexander
ZHANG, Liandong
ZUO, Luo
Sharing risk with the government: How taxes affect corporate risk taking
description Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government.
format text
author LJUNGQVIST, Alexander
ZHANG, Liandong
ZUO, Luo
author_facet LJUNGQVIST, Alexander
ZHANG, Liandong
ZUO, Luo
author_sort LJUNGQVIST, Alexander
title Sharing risk with the government: How taxes affect corporate risk taking
title_short Sharing risk with the government: How taxes affect corporate risk taking
title_full Sharing risk with the government: How taxes affect corporate risk taking
title_fullStr Sharing risk with the government: How taxes affect corporate risk taking
title_full_unstemmed Sharing risk with the government: How taxes affect corporate risk taking
title_sort sharing risk with the government: how taxes affect corporate risk taking
publisher Institutional Knowledge at Singapore Management University
publishDate 2017
url https://ink.library.smu.edu.sg/soa_research/1628
https://ink.library.smu.edu.sg/context/soa_research/article/2655/viewcontent/Sharing_risk_with_the_government__How_taxes_affect_corporate_risk.pdf
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